Shares of Zee Entertainment Enterprises Ltd increased by 5.41% on Wednesday to Rs.234.65 each in reaction to better-than-expected December quarter earnings. On the same day, the broader markets ended marginally positive.

Zee’s December earnings have been better on many parameters. Not only was revenue growth strong, net profit too increased at a faster pace, mainly helped by slower pace of tax outgo. Total consolidated operating revenue increased by 26% to Rs.939 crore from a year earlier. Revenue from both subscription and advertising was strong.

For the December quarter, subscription revenue increased by about 26% and accounted for about 44% of the total revenue. Sure, subscription revenue growth was much faster in the September quarter at 36%, but the December quarter had the highest quarterly subscription revenue. Subscription revenue last quarter was mainly driven by the 33% growth in the domestic subscription revenue to Rs.296 crore. Domestic subscription revenue was aided by the process of digitization and better reporting of subscribers, says Zee’s chief strategy officer Atul Das. The outlook also looks promising with the digitization roll-out. The company gets its remaining portion of subscriber revenue from its international operations, which delivered an uninspiring performance.

Zee derived 54% of its total revenue from advertising, which increased by about 29%—the company attributes this to an increase in market share in many of its channels. Strong revenue growth and slower pace of tax outgo meant that net profit increased by 39% to Rs.194 crore.

ARs.100 invested in Zee at the beginning of this fiscal year has become Rs.185 so far. The stock seems to be factoring in most of the positives at the current levels and trades at about 27 times its estimated earnings for the next fiscal year, making valuations appear expensive. While the outlook on the subscription front is positive, investors would do well to keep a tab on the impact of new investments (in new content and channels) on its operating profit margins. For the nine months ended December, Zee clocked an operating margin of 26%, 200 basis points higher than its FY12 margin. A basis point is one-hundredth of a percentage point.